A manufacturing enterprise operates under a strict budget constraint of \text{\mathbb{N}}20\text{ million} and must choose among three mutually exclusive capital projects: Project X yields an expected net profit of \text{\mathbb{N}}35\text{ million}, Project Y yields an expected net profit of \text{\mathbb{N}}28\text{ million}, and Project Z yields an expected net profit of \text{\mathbb{N}}22\text{ million}. If the firm decides to execute Project X, which statement accurately articulates the fundamental economic relationship between scarcity, choice, and opportunity cost in this scenario?
- Scarcity of capital forces the firm to make a choice, resulting in an opportunity cost equal to the \text{\mathbb{N}}28\text{ million} net profit foregone from Project Y.Answer
- BScarcity of capital forces the firm to make a choice, resulting in an opportunity cost equal to the \text{\mathbb{N}}20\text{ million} financial outlay required to execute Project X.
- CScarcity of capital forces the firm to make a choice, giving rise to an opportunity cost of \text{\mathbb{N}}50\text{ million}, which represents the combined net profit of Projects Y and Z.
- DSelecting Project X shifts the firm's production possibility curve outward, eliminating the opportunity cost associated with unselected projects.
Answer
Scarcity of capital forces the firm to make a choice, resulting in an opportunity cost equal to the \text{\mathbb{N}}28\text{ million} net profit foregone from Project Y.
Because human wants exceed limited resources (scarcity), economic agents are compelled to make a choice based on a scale of preference. When Project X is chosen, the firm sacrifices the benefits of all other options. In economics, opportunity cost is defined specifically as the value of the next best alternative sacrificed—in this case, Project Y, which yields \text{\mathbb{N}}28\text{ million}.
Step-by-Step Solution
Key Concept
Relationship between Scarcity, Choice, Scale of Preference, and Opportunity Cost